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The Netherlands

On May 14 2003 a bill was submitted to Dutch Parliament that seeks to cancel the existing requirement of having to notify the debtors in the event of assignment of receivables under Dutch law. The explanatory memorandum to the proposal states as the principal reason for the proposed cancellation, the unforeseen development since the introduction of the requirement in 1992 of financial products that involve a transfer of a portfolio of receivables, in bulk and at the same time, as is the case in a securitization. In addition, the proposal intends to bring Dutch law in line with similar legislation in countries such as the UK, Belgium, France and Germany.

Under Dutch law the transfer of ownership of assets (including receivables) requires delivery pursuant to a valid legal title by a person who has power of disposal over the assets. For the delivery of receivables, the Netherlands Civil Code still requires a deed of assignment signed by the assignor and the assignee and notification of the assignment to the relevant debtors. The assignment of a receivable is thus only perfected if the assignment is notified to the debtor and until such notification has taken place, legal ownership of the receivable will not pass to the assignee but will remain with the assignor. The consequence is that a notification of an assignment of a receivable after the assignor has been declared bankrupt or has become subject to emergency regulations will not be effective and will not prevent the receivables becoming part of the assignor's bankrupt estate.

The necessity of notification of an assignment of a receivable to the debtor under Dutch law for a transfer of legal ownership of the receivable to the assignee has always been considered an undesirable requirement. Notification can be problematic from a practical point of view in the event of a large portfolio of receivables, and an assignor such as a bank may not want to contact all the relevant debtors (borrowers), both for reasons of costs and because it might adversely affect the bank's reputation if it were known in the market that it planned to sell its customers' loans.

Typically, in the event of a domestic securitization of a portfolio of Dutch receivables, the receivables purchase agreement will provide that the assignment of the receivables by the originator to a special purpose vehicle (SPV) that will issue the notes will not be notified by the originator to the debtors under the receivables except if certain events occur (notification events). Such notification events would generally cover situations where the originator has taken corporate action or other steps have been taken or proceedings started or threatened against it for its dissolution and liquidation, legal demerger, its bankruptcy or suspension of payments.

In order to protect the SPV in the situation that notification of the assignment of the receivables can no longer be effectively made due to the bankruptcy or emergency regulations involving the originator, an undisclosed right of pledge over the receivables in favour of the SPV would be created. Although a full assignment of the receivables is intended, the requirement of notification has to be evaded by creating merely a security right for the SPV.

Under the proposal, an assignment without notification to the debtors should be effected by means of a deed, executed and registered before a civil law notary, or by means of a private instrument offered for registration with the Dutch tax authorities. Such undisclosed assignment is only possible in relation to existing claims or future claims arising from legal relationships already existing at the time of assignment. The proposed change in legislation is expected to come into force in early 2004. It is expected that it will have a beneficial effect on the volume of domestic securitizations in the Netherlands.

Peter ten Broeke

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